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Ten Principles for Creating a New U.S. Clean Energy Policy

We have been debating clean energy for over 40 years, spanning eight presidencies. In spite of incremental movement with each spike in gas prices, we still don’t have agreement on the basic principles of a policy. After surveying historic, economic, scientific, and political realities, ITIF offers a report that lays out what those principles should be. In short, policy must strive to make unsubsidized clean energy affordable, promote meaningful government investment in R&D, enable the private sector to succeed in advanced technology commercialization and deployment, and take a global view to make sure incentives for innovation are global without putting domestic manufacturers at a disadvantage.

Our nation has debated energy policy on and off for over 40 years, yet the same three problems grow worse. First, the United States needs to reduce its reliance on imported oil to strengthen domestic energy security, reduce the trade deficit, and guard against economically harmful swings in global prices. Second, the military needs to reduce its reliance on liquid fossil fuels, which are targeted for attack by our enemies putting our combat troops at greater and greater risk. And third, humankind needs to reduce its consumption of fossil fuels to limit the impacts of climate change.

Unfortunately, while these problems grow worse, the response from U.S. policy makers remains inadequate. Typically, when energy prices go up, energy policy activism spikes. The response might include incrementally increasing energy R&D investment, incentivizing more domestic oil drilling, expanding energy efficiency programs, and/or subsidizing mature alternatives like ethanol. But these activities are rarely sustained, and are frequently pursued in an ineffective piecemeal approach until energy prices come down and attention turns elsewhere. The debate has become so stale and the solutions so ineffective that even policy makers have taken notice. As President Obama recently pointed out, “Presidents and politicians of every stripe have promised energy independence but that promise has so far gone unmet. That has to change. We cannot keep going from shock to trance on the issue of energy security, rushing to propose action when gas prices rise, then hitting the snooze button when they fall again.”

Instead of the same tried and failed approaches, decision makers would be well advised to learn from nearly a half century of failed energy policies and finally implement a long-term solution: an energy policy that leads the United States down the path to cheap, domestically produced clean energy.

So here we are again. Oil prices are rising, climate change is worsening, hundreds of billions of dollars are flowing annually to overseas oil producers, and the United States is engaged in multiple wars in oil producing regions. The political rallying cry is getting louder: the United States needs a new energy policy. But instead of the same tried-and-failed approaches, decision makers would be well advised to learn from nearly a half century of failed energy policies and finally implement a long-term solution: an energy policy that leads the United States down the path to cheap, domestically produced clean energy. Within this framework, ITIF proposes ten guiding principles that are fundamental to crafting a new policy and meeting our energy challenges:

Policy should seek to make the unsubsidized cost of clean energy cheap. There is a difference between cost and price. Our clean energy policy today is largely focused on reducing the price of mature technologies through subsidies like tax credits, rebates, payouts, and low-cost financing. Instead, it should be focused on reducing the cost through spurring technological innovations that enable clean energy to be produced more cheaply than coal-powered electricity or gasoline-powered vehicles.

Government support for innovation is central to making clean energy cheap. Examples of the critical role public support played in driving innovation are pervasive, and government needs to play the same role in clean energy. A key reason is that the private sector regularly underinvests in early stage research, creating a gap that must be filled with government support (through both tax incentives like the R&D credit and direct funding for R&D).

Clean energy innovation means more R&D, but also more transfer, testing, demonstration, and deployment.Getting the clean energy we need is expensive and faces many obstacles. To go from initial R&D to commercial viability involves bridging multiple “valleys of death.” Government support is needed to bridge these valleys and move low-carbon technologies from the lab to the market.

The public and private sector must both play a role in clean energy innovation. Conventional wisdom among some holds that business is the lone engine of innovation, and that government should simply get out of the way. But this “wisdom” ignores the critical role public-private collaborations have had over the last century in making many technological transformations possible. We need the resources and insights of both the public and private sectors for a successful clean energy innovation policy.

Clean energy policy should “pick winners,” not by picking national champions, but by broadening the technology menu and then letting the market decide. It has become an aphorism that the government can’t pick winners, only the market. But in market economies, private firms rightly focus on maximizing private returns alone, which means they will underinvest in socially desirable sectors and technologies. If we thus define “winners” in this way, then only government can identify sectors with large societal returns and foster innovation in them.

Support for clean energy innovation should be viewed as an investment in the future, not wasteful interest-driven spending. Cutting investments that provide a positive societal payoff under the guise of fiscal responsibility is akin to a parent who refused to pay for their children’s college so that they could leave them a bigger inheritance. In short, cutting clean energy investments is penny wise and pound foolish.

Clean energy policy should reinvigorate, not hurt, U.S. export industries. The competitiveness of the U.S. economy should be a central goal of any new clean energy policy to make it not only politically but also economically viable. We need to steer clear of policies that would send jobs overseas.

Public investment should emphasize technologies with a clear upside – even if they’re currently unpopular. Criticisms of many commercialized and experimental energy technologies, such as nuclear power, are often vociferous. However, instead of scrapping them outright, we should ask whether they can be improved through innovation, and what investments are needed to make that happen.

“Cleaner” is not the same thing as “clean.” Just because some energy sources like natural gas are not as dirty as coal does not mean they’re clean; and just because they are abundant now does not mean they will last forever. To achieve the goal of sustainable zero-emissions energy, we should be careful not to give natural gas or other sources advantages in the short run that could crowd out investments in other, better, cleaner energy technologies in the long run.

A global energy challenge requires a global effort that ensures proper incentives for innovation. We won’t get the needed levels of innovation if other nations play by mercantilist rules. Forced clean tech transfer, intellectual property theft, and even clean tech export subsidies hurt, rather than help, the global challenge to transition to clean energy, because they reduce the incentives for clean energy innovation.